How Does a Distribution Agreement Work?
Thinking about entering into a distribution agreement? Need help figuring out how it works? This article covers what you need to know.
Just to recap, a distribution agreement is a contract between the supplier and distributor. The distributor has the right to sell the supplier’s goods and services. Usually, the distributor sells to a network of retailers, as opposed to selling directly to the public. Sometimes, the distributor can use the supplier’s intellectual property when advertising. However, distribution agreements must be specifically drafted. Incorrectly drafted distribution agreements have unintended effects. You could end up drafting a perfectly good franchisor/franchisee agreement instead!
Essential Terms in Distribution Agreement
Not every agreement is the same. However, essential terms need including. These terms include:
- Distribution Territory – where can the goods and services be sold?
- Distribution Length – for what period can the goods and services be distributed?
- Exclusivity – is the distributor the only distributor or will there be others, including even the supplier?
- Obligations – how should the distributor sell the supplier’s goods and services?
- Price of Goods – the price paid to the supplier for the goods;
- Payment – cut of distribution profits and how frequently they are paid.
Distribution agreements are sometimes unbalanced. Bargaining power depends on the position and expertise of the parties. Suppliers and distributors have different wants and needs. You need to speak to a lawyer to bargain the best deals.
Here we’ll provide an insight into what a distribution agreement means for both suppliers and distributors.
The supplier is usually the manufacturer of the good or designer of the service. Likewise, suppliers use distributors for a number of reasons. Some of the most common reasons include:
Lack of Expertise
Suppliers may know how to make the product, but have no idea how to sell it. They rely on distributors who have experience and contacts for selling to the community. Distributors also have experience in marketing the product and can make it easy accessible for consumers.
Especially if the supplier has not done retail before, it is expensive to set-up. By relying on a distributor, the supplier can see returns on their product faster by obtaining a percentage of distributor sales.
Although it is possible for a supplier to distribute their own goods and/or services, it takes a lot of time and effort. To conserve their efforts for designing and manufacturing the product, it is often easier to just rely on a distributor.
Distributors do not usually manufacture goods and therefore rely on suppliers for the actual product. They need suppliers for a variety of reasons. Some of these reasons include:
Manufacturers own the factories, machinery and tools needed to make the products or services. Distributors do not own this property and therefore would need to purchase it or hire independent manufacturers. Also, they do not have relations with raw material providers. Therefore, they cannot get good deals and discounts
Distributors do not have the expertise to design products and services in contrast to suppliers. Furthermore, hiring designers is costly.
Finally, distributors often start from scratch and must tread lightly. They need to be creative with their designs to avoid possible lawsuits.
Australian Competition and Consumer Act 2010 (Cth)
This Act covers distribution agreements. Even more, suppliers must be careful not to misrepresent their products to distributors. The distributor needs to know exactly what they are buying.
A distribution agreement is a good way to maximise profits, without having to expand into unfamiliar markets. However, they need to be drafted carefully. You need to consult a company lawyer for this.
Need to know more? Contact a LawPath consultant on 1800 529 728 to learn more about Distribution Agreements and to obtain a fixed-fee quote from Australia’s largest legal marketplace.
Vincent is a Legal Tech Intern at Lawpath as part of the Content Team. He is in the second year of his Juris Doctor law degree at Macquarie University. He is interested in both International Commercial Law and Criminal Law.